Much as we have a positive view about NZ growth on the back of eventually rising farmer spending (of which there is evidence) and the rebuilding of Christchurch, one would be foolish to ignore the clear downside risks to growth posed by the deteriorating global outlook which we have been writing quite a bit about in recent weeks. Greece is continuing its march toward some sort of default, French and German governments are putting plans in place to shore up their banks for the losses they will suffer on Greek government bonds, the data out of the US remain poor, the OECD leading index has fallen at its fastest pace since early-2008, and in Australia business sentiment has fallen away anew as the unemployment rate rises.
Locally we may all be rightly enthralled by the Rugby World Cup and the very welcome distraction it provides from the continuing weak growth environment. But it pays to keep an eye on NZ data which are not coming in all that strong. There is an upturn in the residential real estate market but it is a mild one with few average price rises. The tourism, construction, wine and timber sectors are in recessions which look like getting worse in the near term, jobs growth is tracking just below 1% per annum, and spending on cars and commercial vehicles is easing in seasonally adjusted terms.
It is certainly true that sentiment readings, employment and investment intentions are strong. But we suspect the radically altered world has changed the relationship between such measures and what we end up spending as consumers, and investing/employing as businesspeople.
Taking all these factors into account and a lot more it is no surprise that this morning the Reserve Bank left their cash rate unchanged at 2.5% and took away their warning that the emergency cut of 0.5% after the February earthquake will need to be removed soon. Their dovish comments have seen us shift our current pick for the first official cash rate rise yet again, this time to March next year. Be prepared for further changes because as we have highlighted for at least a couple of years now, the current economic environment is extremely uncertain and it seems that every week if not day we learn something new. Forecasts are guaranteed to change and in this sort of environment it pays to keep debt low, build strong cash flows, watch debtors and inventories closely, and keep the majority of one’s debt on a floating rate basis – perhaps through the entire interest rates cycle – however long it may be.Download document